Friday, June 6, 2014

Baxter International (BAX) Dividend Stock Analysis

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. This dividend paying company has paid dividends since 1934 and has managed to increase them for 8 years in a row. Up to 1998, the company was a dividend aristocrat that had increased dividends for 42 years in a row. However, after a few spin-offs, the dividend was frozen until 2006.

The company’s latest dividend increase was announced in May 2014 when the Board of Directors approved a 6% increase in the quarterly dividend to 52 cents /share. The company’s peer group includes Medtronic (MDT), Becton Dickinson (BDX) and C.R. Bard (BCR).

The company has managed to deliver a 9.20% average increase in annual EPS over the past decade. Baxter International is expected to earn $5.13 per share in 2014 and $5.44 per share in 2015. In comparison, the company earned $3.66/share in 2013.

Back in March 2014 the company announced that it was in the process of splitting into two parts. One will be focusing on developing and marketing biopharmaceuticals, while the other will be focusing on medical devices. The biopharmaceuticals division will be spun-off to existing Baxter shareholders some time in 2015. There are a few benefits to the split, including ability for management to focus on the distinct businesses of biopharmaceuticals and medical products, which will bring new and existing product offerings and drive innovation across the franchises.

Baxter’s BioScience and Medical Products businesses enjoy leading positions based on a number of competitive advantages. The BioScience business benefits from continued innovation in its products and therapies, consistency of its supply of products, and strong customer relationships. The Medical Products business benefits from the breadth and depth of its product offering, as well as strong relationships with customers and patients, including hospitals and clinics, customer purchasing groups, pharmaceutical and biotechnology companies, and the many patients who self-administer the home-based therapies supplied by Baxter.

Baxter’s competitive advantages include its portfolio of patents, strong brands, economies of scale, and strong R&D pipeline of new products. These allow the company to maintain its competitive position, maintain pricing power, and prevent rivals from gaining market share at the expense of Baxter.

Growth could come from new product innovation, strategic acquisitions, growth in emerging markets, and expansion in manufacturing capacity. Currently, approximately 20% of sales are derived from emerging markets. This is expected to reach 30% of sales by 2017. In 2013, the company acquired Gambro AB, who is innovator in in-center hemodialysis and acute renal care products. This would improve Baxter's economies of scale and product breadth.

The annual dividend payment has increased by 12.40% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade. Going forward, I expect dividends to grow by less than 9%/year.

A 12% growth in distributions translates into the dividend payment doubling every six years on average. If we check the dividend history, going as far back as 1983, we could see that Baxter International has actually managed to double dividends every eight years on average.

Over the past decade, the dividend payout ratio decreased from 93% in 2004 to 27% in 2006. Since then, it has been increasing gradually to 52.50% by 2013. Based on forward earnings however, the dividend payout will decrease to 40%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has increased from 10.80% in 2004 to 26.10% in 2013. The values in 2004 were unusually depressed due to one-time accounting charges. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock is attractively valued, as it trades at a forward P/E of 14.50 and yields 2.80%. Given the scarcity of quality dividend payers available at attractive values today, I am considering initiating a position in the company, subject to availability of funds.

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